S-REITs take a beating, but there’s long term upside

Our local REITs have been hammered in recent weeks and I think there are two macro factors which continue to leave an overhang on their path for price appreciation:

  1. Uncertain economic and demand recovery
  2. Repricing of rental demand

Uncertain economic and demand recovery

Singapore, being a highly open and export led economy with globally integrated supply chains is facing continued pressure on its economy because COVID-19 has yet to be controlled in many parts of the world.

This dynamic, coupled with slow progress on the vaccine and continued travel bans, is going to put pressure on the pace of demand recovery.

Despite some government intervention to support jobs and alleviate cash flows, with slowing demand, we should continue to expect lackluster demand for office spaces, falling rent reversions, and limited appreciation in property values.

Repricing rental demand

With this elongated recovery schedule and lacklustre demand on both the retail and corporate side, we can expect that rents could fall further to maintain the same level of occupancy.

Lower rents will lead to lower incomes for REIT holders since close to 90% of income is distributed as dividends.

The impact of this factor depends on the type of REIT. For example, retail REITs with lower rental commitments will probably see more churn and faster downward reversions in rentals that will cap upside in their prices.

CapitamallTrust 3Q20 Financial Results

We are already seeing some businesses – especially those dependent on tourism demand – being forced to shut and shops empty in some of our local malls.

Singapore REITs in my portfolio

Personally, REITs occupy around a 10% to 15% allocation in my investment portfolio as I like them for their recurring dividend stream which I can use for my day to day expenses.

It’s no use if you don’t get to enjoy your investment funds until retirement, so REITs form the recurring income stream of my portfolio where I can use their income to pay some of my bills, insurance premiums, and maybe some of my monthly expenditure.

One point to add why I like Singapore REITs is that their dividends to individuals are taxed exempt, which makes it extremely attractive for retirees who are relying on such income to fund their retirement expenditure. This is unlike US REIT dividends which are heavily taxed at 30%.

Why I am still long term bullish on Singapore REITs

Despite the near term headwinds, I am still moderately bullish on REITs once this pandemic ends.

I expect rents to continue sliding as companies shift some operations remote and shopping online becomes more accessible to a greater percentage of the population – REIT shareholders will eventually have to share some of the cost burden in the form of lower dividends.

However, there are no alternatives to the limited physical spaces that we have in Singapore – unlike other countries where we can take a weekend trip to the countryside, physical spaces will still remain a cornerstone in our cityscape as a place for social and leisure activities.

This dynamic will continue to support demand for real estate in Singapore as long as Singapore remains an attractive location for work, play and live.

If you’re still early in your investing, this period might be a great opportunity to scoop up some long-term Singapore REIT holdings at attractive prices.

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